Changes

3.  Suppose your favorite hobbies are reading books and hiking, and imagine that they have the following values for marginal utility.  The first hour that you hike gives you lots of utility:  10 units.  But as you start to tire, you enjoy and benefit from it less.  The next hour of hiking is worth only 8 units of utility (in other words, it has a marginal utility of 8 units rather than 10), and the next hour of hiking is worth only 5 units, and then 3, then 1, and then zero for the next hours, in that order.  Your marginal utility for reading books does not decline so quickly.  In the first hour, reading a book gives you utility of 6 units; the next hour is worth 5 units; the next hour is worth 4 units; and then 3, 2, 1 and 0.  Suppose that you have 5 extra hours today.  How should you spend those hours on hiking and reading in order to maximize your utility, and what will be your total utility for those 5 hours?  Explain your answer.

3.  Suppose your favorite hobbies are reading books and hiking, and imagine that they have the following values for marginal utility.  The first hour that you hike gives you lots of utility:  10 units.  But as you start to tire, you enjoy and benefit from it less.  The next hour of hiking is worth only 8 units of utility (in other words, it has a marginal utility of 8 units rather than 10), and the next hour of hiking is worth only 5 units, and then 3, then 1, and then zero for the next hours, in that order.  Your marginal utility for reading books does not decline so quickly.  In the first hour, reading a book gives you utility of 6 units; the next hour is worth 5 units; the next hour is worth 4 units; and then 3, 2, 1 and 0.  Suppose that you have 5 extra hours today.  How should you spend those hours on hiking and reading in order to maximize your utility, and what will be your total utility for those 5 hours?  Explain your answer.

:The income effect is the wealth that you gain or lose when the price of an item changes.  For example, if hamburger is on sale for $.99 per pound vs $1.99 a pound, the effect is that I am gaining $1 and will purchase more hamburger as a result.  (Shanna)

:I would spend 3 hours hiking and 2 hours reading.  That would be 10+8+5+6+5=34 hour’s total utility.  the decrease in marginal utility between the two activities cross each other at 5 units, so that is about as low as you want to go for hiking, since the next decline is a lot less than the upper levels of utility for reading, so we'll substitute reading for hiking at that point. If you cross the two decline slopes you want to choose the points above the cross to maximize utility.  (Aran)

4.  Suppose you plan to buy a brand new car for $25,000.  When you do to the car dealership to make your purchase, you notice that there is a car on the lot that looks brand new but not longer has the sticker price on it.  The dealer says it was returned by someone after driving it only 100 miles.  You like the color and ask if you can buy it.  The dealer, seeing that you’re so interested, says he’ll sell it to you for the same price as a brand new car that has never been sold.  You’re willing to buy it at full price, and do not mind one bit that someone else used it briefly and returned it.  But you notice that other people (the “market”) would not pay full price for a returned car.  Relying on the “market” rather than your personal preferences, what should you tell the dealer in order to maximize your benefits from your purchase?

4.  Suppose you plan to buy a brand new car for $25,000.  When you do to the car dealership to make your purchase, you notice that there is a car on the lot that looks brand new but not longer has the sticker price on it.  The dealer says it was returned by someone after driving it only 100 miles.  You like the color and ask if you can buy it.  The dealer, seeing that you’re so interested, says he’ll sell it to you for the same price as a brand new car that has never been sold.  You’re willing to buy it at full price, and do not mind one bit that someone else used it briefly and returned it.  But you notice that other people (the “market”) would not pay full price for a returned car.  Relying on the “market” rather than your personal preferences, what should you tell the dealer in order to maximize your benefits from your purchase?

6.  Describe either the "income effect" or the "substitution effect."  Take your pick.

6.  Describe either the "income effect" or the "substitution effect."  Take your pick.

7.  Charity is based on the foundation of a successful free market.  Or is a successful free market based on a foundation of charity?  Describe and explain which is the cart, and which is the horse (in other words, which comes first or is most important, charity or the free market).

7.  Charity is based on the foundation of a successful free market.  Or is a successful free market based on a foundation of charity?  Describe and explain which is the cart, and which is the horse (in other words, which comes first or is most important, charity or the free market).